Sunday, March 31, 2013

The Early Christian Attitude to War

The title of this post is taken from a book by the same name, written by C. John Caddoux, and originally published in London in 1919.  It has been reprinted by Vance Publications in 2005, and can be found here.

Note the time and place of the original publishing of the book.  This was just at the conclusion of the Great War, in the capitol of one of the belligerents.  Certainly much of the work done by Caddoux was accomplished during this war, a war of most unspeakable destruction.  He was writing at a time when nominally Christian people were killing other nominally Christian people by the millions.

As I have done with other books, I intend to write several posts on this topic as I read through the book.

I begin with a quote from the Foreword, written be W.E. Orchard:

… [war] is a subject that will not cease to vex the Church until we have decided either to make as unequivocal a condemnation of war as we have of slavery, or to abandon altogether any profession of whole-hearted allegiance to the Christian faith.

It is impossible to reconcile the teachings of Jesus with the attitude many Christians display towards war and the state.  Laurence Vance provides the most thorough commentary on this prevailing attitude, for example see here and here.  Vance is also behind the reprinting of this subject volume.  The work by Caddoux is the most thorough examination of the views on war of the early Christians – those who most closely knew the teaching of Jesus and his disciples.

Among the many problems of Christian ethics, the most urgent and challenging at the present day is undoubtedly that of the Christian attitude to war….everywhere by overwhelming majorities Christian people have pronounced in word and act the same decision, viz. that to fight, to shed blood, to kill – provided it be done in the defence of one’s country or of the weak, for the sanctity of treaties or for the maintenance of international righteousness – is at once the Christian’s duty and his privilege.  But only by an act of self-deception could anyone persuade himself that this is the last word the Christian conscience has to say on the matter.

Caddoux recognizes the potential shortcomings of the views of those in the first centuries of the church, describing the Christian mind as “relatively immature” and still in “the simplicity of its childhood.”  Yet, he finds the enormous accomplishments of the church during this time more than enough to counter these shortcomings:

…the first three centuries were the period in which the work of the Church in morally and spiritually regenerating human life was done with an energy and a success that have never since been equaled, when the power springing from her Founder’s personal life pulsated with more vigor and intensity than was possible at a greater distance…

He begins his study of this early Christian period with an examination of the teachings of Jesus:

There is a sense in which it is true to say that Jesus gave his disciples no explicit teaching on the subject of war.

Caddoux goes on to explain that this should not be surprising, and such an ‘omission’ is not unique.  For example, there was no record of any event which might afford Jesus to speak out regarding slavery.  Jesus had little if any cause to speak directly about military service and war.  He was living and working and teaching among Palestinian Jews, a population virtually unrepresented in the Roman military.  No Jew could be compelled to military service.

Caddoux cites the many passages where Jesus speaks in terms of non-violence and even passivity.  Jesus reaffirmed the commandment to not kill, for example.  His Sermon on the Mount offered non-resistance as good and right.  Most compelling, Jesus did not use or advocate political or coercive means to achieve His ideals:

In the one corner of the Roman world where the passion for an independent national state still survived, he had no use for that passion.

That force could be applied through political means did not sanitize the use of force for Jesus.  He found His calling through teaching.
Was not Jesus tempted by Satan – in fact, offered the whole world?  Caddoux suggests that the only way this could have been achieved was through military violence:

…was he not in any case invested by God with supreme authority over men, and was it not his life’s work to bring in the Kingdom as speedily as possible?  Assuming that the use of military force did not appear to him to be in itself illegitimate, why should he not have used it?  Had he not the most righteous of causes?  Would not the enterprise have proved in his hands a complete success?  Would he not have ruled the world much better than Tiberius was doing?

Friday, March 29, 2013

Fractional Reserve Banking: Is it Fraud?

I will begin with my answer: maybe.  It depends on the contract.  Allow me to explain….
Fractional reserve banking is labeled by some as a fraudulent practice.  Murray Rothbard devotes a chapter to this in his book, “The Mystery of Banking.”

First, it is appropriate to define the term fraud.  I offer the following definitions from three different sources; the first from a common dictionary, and the latter two from two different law dictionaries:

Fraud: deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.

Fraud: A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

Fraud: the intentional use of deceit, a trick or some dishonest means to deprive another of his/her/its money, property or a legal right…. Inherent in fraud is an unjust advantage over another which injures that person or entity.

Fraud is a difficult term to apply to real-world situations – one of those “I will know it when I see it” terms.  I will offer what I see.  I would like to examine the application of the term “fraud” to various aspects of money and banking.

It is also helpful to define what is meant by fractional reserve banking:

Fractional-reserve banking is the practice whereby a bank retains funds equal to only a portion of the amount of its customers' deposits as readily available reserves (currency on hand at the bank plus deposit accounts for that bank at the central bank) from which to satisfy demands for payment. The remainder of customer-deposited funds is used to fund investments or loans that the bank makes to other customers.

Fair enough.  Now, is it fraud?  I offer three cases to assist in answering this:

Case 1

Let’s start with what began as deposit banking:

I take one ounce of your gold in deposit and provide a receipt for your gold.  I will hold your gold for you in storage.  I will charge you a fee to do so.  I will deliver your gold upon demand and presentation of the valid receipt. 

Assuming I do exactly as I state – warehouse your gold for you – there is clearly no fraud. 

However, as warehouse operator, I decide to surreptitiously make a little extra income on the side.  Without changing any of the terms of our agreement, thus leaving you in the dark, I change my action:

I then lend out some of your gold, in order to make an additional profit.  I hope that I am able to meet your withdrawal demands.

This, to me, is the cleanest example of fractional reserve banking.  Is there a fraud here?  It seems to me that whether or not I am always successful in meeting withdrawal demand, there is a fraud.  The clearest issue is that I am charging you for a service that I am not performing.  A secondary issue is that there are two receipts for the same good, providing each receipt holder with the belief that he has immediate claim on the goods.

Case 2

In this case, consider the following terms:

I take one ounce of your gold in deposit and provide a receipt for your gold.  I do not charge you a storage fee; I may or may not pay you interest on your deposit.  I give you a receipt stating that I will deliver to you an ounce of gold upon demand and presentation of the valid receipt. 

Note: I do not state I will store your gold.  I charge you no fee for storage.  In fact, I even find a way to pay you interest on your gold.  This seems to me to be a perfectly valid arrangement, to the extent there are willing participants.

Within the confines of our agreement, I find a contractually-acceptable way to make a little extra income on the side:

I then lend out some of your gold, in order to make an additional profit.  I hope that I am able to meet your withdrawal demands.

Is there fraud here?  I never said I would store your gold, and I do not charge you in any case.  Are there two receipts for the same gold?  Yes, but the receipts have conditional claims.  My receipt to the depositor is clear that I am not storing the gold.  As long as the receipts were properly noted, I see no fraud here.

Case 3

Let’s go one step further:

I take one ounce of your gold in deposit.  I do not charge you a storage fee, although there may be other administrative fees associated with your account; I may or may not pay you interest on your deposit.  As reflected in our contract, the gold becomes part of my capital base, allowing me to do with it what I will.  I offer you a receipt stating that I will make best efforts to return an ounce of gold to you upon demand and presentation of the valid receipt. 

This also could be a valid arrangement, given willing participants.  Again, within the terms of our agreement, I utilize this capital to make additional income on the side:

I then lend out some of my gold (as it is now part of my capital base) in order to make an additional profit.  I hope that I am able to meet your withdrawal demands.

Again, there is no fraud here.  There certainly are not two claims on the same gold – the gold is mine, not yours, at least in terms of priority.

Case 3 describes, in very basic terms, the current banking system.  The end of deposit banking came through a few court decisions in England in the early 1800s.  To make a long story short, it was ruled that deposits made at the bank became property of the bank; the bank is bound to pay a similar amount in return when demanded.  From Lord Cottenham’s decision in the ultimate case, decided in 1848.  From Murray Rothbard, “The Mystery of Banking”:

The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted.

One doesn’t have to like the decision, but law in regards to deposit banking seems to have been built on this foundation ever since.  What is interesting to me is why traditional deposit banks did not immediately spring up again, in a different form.  I guess, to say it differently, why have not / cannot private contracts reestablish such a practice?

What are some common objections to these observations?

Wednesday, March 27, 2013

Rothbard and Free Banking

The Mystery of Banking, by Murray Rothbard

Chapter VIII: Free Banking and the Limits on Bank Credit Inflation

I am reading this book by Rothbard because I want to understand his argument regarding the fraud of fractional reserve banking.  He presents this case quite directly in Chapter VII.  I will in the near future explore Rothbard’s arguments regarding the fraud (I have certain disagreements on this subject), however I believe it is valuable to first work through his views on free banking.

As with all of Rothbard’s writing, I find his work here so simple and direct, so easy to understand, that I find little reason to interject any of my own thoughts for the purpose of clarification.

Mention free banking at a table full of Austrians, and you will typically get one of two reactions:
1)      Well of course.  If you believe in free markets, why would this not extend to banking as well?
2)      Banking must be based on 100% reserves – gold reserves, in fact.  Anything else is fraudulent.

From my limited exposure to the monetary ideas of the champions of the Austrian school, what I have found is that Rothbard appears to be the first and strongest proponent of the idea that fractional reserve banking is fraudulent.  When Mises discusses free banking, he does not mention fraud – instead he focusses on how free banking offers a self-regulating means to check credit expansion.  Sennholz discusses the reforms he would advocate to move toward a proper market-based banking system.  Of the seven items he lists, not one deals with reserve requirements.

I am sure I am missing many examples, likely on both sides of this discussion – I am no scholar in this field.  But I look for clues, and have been in many discussions, and I have yet to find examples or suggestions counter to my understanding as described above.

I fall into the camp of 1) above.  No, I do not believe fraud is acceptable in a free market, but I have yet to be convinced that what we have in banking today is fraud in the sense of a warehouse issuing multiple receipts to the same good.  In any case, I will go into this further in a subsequent post – this will come when I work back to Chapter VII.

For now, I will look into Rothbard’s views on free banking.  As the premier (to my understanding) advocate of the idea of fractional reserve banking as fraud, it seems instructive to understand Rothbard’s views on free banking.

Let us assume now that banks are not required to act as genuine money warehouses, and are unfortunately allowed to act as debtors to their depositors and noteholders rather than as bailees retaining someone else’s property for safekeeping. 

I find no reason to require banks to act as anything.  Let each institution devise its business plan and then see if they can succeed in the marketplace for customers.  I will propose even taking a step back from Rothbard’s assumption – assume an environment where banking is so free that even deposit banking is reborn.  In this case, I would not consider it unfortunate that some banks are allowed to act as debtors to their depositors – as long as the relationship is documented properly.

Let us also define a system of free banking as one where banks are treated like any other business on the free market.  Hence, they are not subjected to any government control or regulation, and entry into the banking business is completely free.

Additionally, no government insurance for deposits, no government authorized lender of last resort, none of it.  I am quite certain that these features are inherent in Rothbard’s statement.

There is one and only one government “regulation”: that they, like any other business, must pay their debts promptly or else be declared insolvent and be put out of business. 

This need not be a “government” regulation, and given Rothbard’s credentials as the ultimate libertarian if not anarchist, I suspect he means “government” as in governance, and certainly not the state as manifest today.

In short, under free banking, banks are totally free, even to engage in fractional reserve banking, but they must redeem their notes or demand deposits on demand, promptly and without cavil, or otherwise be forced to close their doors and liquidate their assets.

The above four quoted items are taken from the first paragraph of the chapter.  This, to me, is the proper place to start – a market free from government interference, control, or favor.

Let us examine whether there are any strong checks, under free banking, on inflationary credit expansion.

Tuesday, March 26, 2013

Please, Stop With the Deflation Talk

Is it still possible that deflation is a risk?  According to A. Gary Shilling, there are seven varieties of deflation, and five of these have already taken hold.

Now, it was confusing enough for me when there were only two ways to discuss deflation (and inflation) – monetary, and price.  Of the two, monetary is the proper focus; price is easily manipulated and is not usually the first visible distortion.  Due to varying factors, prices may not noticeably be impacted even though monetary manipulations are rampant – yet distortions are manifest.

But I digress.  Now, apparently there are seven.  The five that have arrived, according to Shilling, are:

Commodity Deflation
Wage-Price Deflation
Financial-Asset Deflation
Tangible-Asset Deflation
Currency Deflation

The two that remain open are:

Standard Inflation/Deflation
Inflation by Fiat

His definitions are silly, for example:

Inflation by Fiat: I developed this concept in 1977 to encompass all the ways by which Congress, the president and regulators raise prices.  Increases in the minimum wage are a case in point. So, too, are higher tariffs on imports.

There is nothing on the list that cannot be better explained simply by the manipulation of money credit, and interest rates – with the booms and busts that follow.

But I don’t intend to go through this list of seven one by one.  This isn’t my point.  Instead, why is anyone talking about deflation – of any kind?

For every argument toward deflation, I can raise you $222 trillion in opposition.  This is the estimate by Laurence Kotlikoff of the present value of the unfunded liabilities of the US Federal government.  The number is increasing by $11 trillion per year recently.  Add to this the unfunded liabilities of the 50 states and in addition the unfunded liabilities of every country in the world.  Let’s say, for discussion purposes, this is a couple quadrillion dollars (hey, if you have a better number, I am open to it).

Every time price deflation (as measured by the various, understated government statistics) even peaks its head out from its burrow, central banks will buy some of this government debt.  “Oh no, Ben, I see some price deflation over there!”  “Don’t worry; I will pick up that $7 trillion US government deficit for the year. That should cover it.  Fire up the helicopter!”

Every hint of price deflation will be met with central bank purchases.  Do you really believe the Fed has a plan to shrink the balance sheet back to someone’s definition of “normal”?  The balance sheet will see ten trillion dollars before it sees one trillion.

This is why I envision the juggling act could go on for an extended period of time – all the while, more and more resources are commanded by the government / political sector, shrinking the pie for the productive and impacting the standard of living for all but the politically favored classes.

There will be no deflation – not if your definition is monetary, price, or even the seven types offered by Shilling.  The central banks have your back, and the governments of the world will keep their promises thanks to central bank purchases for as long as there is little to moderate price inflation.

Up, up, and away!

Steve Forbes: Conspiracy Theorist

Steve Forbes sees in Cyprus the seeds of multiple conspiracies.  Welcome to the club, Steve. 

Forbes asks: “Can a Cyprus-Like Seizure of Your Money Happen Here?”  Before moving on to his numerous other conspiratorial views, I will answer this question.


Your bank deposits do not belong to you, but to the bank.  In case of bank default, the deposits belong to other senior creditors until various debts of the bank have been satisfied.  Your only salvation is in government insurance, to the extent this is honored.

Lew Rockwell offers the following advice.  It should be heeded:

After Cyprus, if you or your business has more than $250,000 in a fractional-reserve bank, get the "non-insured" portion out. Put it in another bank, or buy gold, or do something else good with it. This is the least radical move you can make as a bank-denier, but surely the beginning of prudence.

Forbes also answers his own question affirmatively:

Don’t put it past our politicians to try it in a financial emergency. The breaking of contracts by the U.S. government, unfortunately, has happened before….

It is difficult to use the term “contracts” when the US government is involved.  Consider the structure: the government is a) one of the parties to the agreement, b) the adjudicator of disputes regarding the agreement, c) the writer of the rules to the agreement, and d) the modifier of previously written rules regarding the agreement. 

If a stranger walked up to you and offered to play this role, would you voluntarily agree?

Consider all of the financial aspects of our lives where this is the case: retirements plans, trusts, banking arrangements, brokerage accounts, real estate holdings, tax policies, etc.  To varying degrees, there is no security in any of our financial positions, or legal strategies designed to protect or enhance our financial positions.  The government controls the terms and adjudicates the disputes to agreements of which it is a party.

Forbes goes on to list a few of the US government transgressions of the past; conspiracy facts, as these are historically known events:

In 1933–34, amid the depths of the Great Depression, the U.S. government seized the American people’s gold holdings.

In the early 1970s President Richard Nixon annulled contracts selling soybeans to Japan.

For this one, Forbes goes on to note the blowback: “(Japan responded by investing in Brazil, which became one of our major soybean competitors.)”

In 2009 the Obama Administration pushed through a brazenly political restructuring of bankrupt General Motors and Chrysler, and huge payoffs were made to the United Auto Workers, a pro-Obama union, at the expense of bondholders.

Forbes doesn’t list the famous act of Nixon in 1971, but any attempt to compile a complete list would be futile.

Forbes moves on to conspiracy theory.  Many of these have been floating around the hidden corners of the internet since the early days of the crisis, but now, with Forbes’ blessing, one can certainly say these have gone mainstream:

There have been rumblings from some revenue-hungry Democrats about finding ways to tap into individuals’ retirement accounts.

Some form of this will happen; I suspect the legislation is already written.  I think all it will take is another bear-market disaster, similar to 2008 – early 2009.  The government will promise a “make-whole” transfer, offering to credit to the individual the high-water mark of his retirement account if he transfers the assets to a government-approved account.

Most of the money in 401(k)s is pretax dollars and grows tax free, depriving the government of needed revenue. Why not integrate them with Social Security and then means-test the benefits?

Yes, why not?  The government writes the rules; the government can change the rules.

Holders of Roth IRAs may be in for a rude shock. Their contributions have been made with aftertax dollars, with the promise that the ensuing benefits would be exempt from federal income tax. Slapping a special “emergency” levy on these assets will become an irresistible temptation for politicians as the pot of assets gets bigger.

Isn’t it interesting that recent tax law allowed the conversion from traditional IRAs to Roth IRAs.  This accelerated tax receipts to the government, as the tax had to be paid on the previously deferred amounts at the time of conversion as opposed to in the future, coincident with standard withdrawals.  If Forbes is correct, the government will take two bites at this apple.

Forbes offers an example from history of a similar action:

Your Social Security “contributions” are made with aftertax dollars, and it was promised that those benefits would be tax free, but Washington started chipping away at that vow back in the 1980s. Today millions of Social Security recipients find a portion of their benefits subject to the IRS.

Forbes notes the stupidity of this Cyprus plan; any hint of a crisis in another state will send depositors scurrying to withdraw cash, furthering the banking crisis.  He is right, but anyone not insuring against this risk today, anywhere in the world, is already playing with fire.

In fact, that the technocrats first proposed taking a haircut from all accounts was somewhat baffling to me.  I have only recently written that the elite (the inner circle well hidden from even many senior-technocrats) desire to defend regulatory democracy over all else as the economic crisis is managed.  This will ultimately lead to sovereign defaults if this is what is necessary to maintain the people’s faith.  They will not allow insured deposits to fail. 

Allowing the banking system to fail the masses is a sure way to have the general population turn against the system.  I couldn’t believe that insured deposits would take a hit, as initially proposed in the Cyprus plan.  In the final plan, Cyprus chose to keep whole the insured deposits –perhaps someone took a phone call.  My theory has survived. Three weeks and counting! 

In the meantime, I welcome Steve Forbes to the club of conspiracy theorists.

Monday, March 18, 2013

The Second Amendment and the Fear of Standing Armies

Bernard Bailyn, a Colonial and Revolutionary War historian, wrote The Ideological Origins of the American Revolution, first published in 1967. 

From Wikipedia:

[Bailyn] is known for meticulous research and for interpretations that sometimes challenge the conventional wisdom, especially those dealing with the causes and effects of the American Revolution. In his most influential work, The Ideological Origins of the American Revolution, Bailyn exhibits through a thorough analysis of pre-Revolutionary political pamphlets that the colonists believed that the British intended to establish a tyrannical state that would abridge the historical rights of the colonists.

The referenced items in this post are taken from a compilation of essays regarding the Revolutionary war, The American Revolution: The Search for Meaning, edited by Richard Hooker.  This compilation includes an excerpt from Bailyn's book.

Consider the following through the lens of the Second Amendment to the Constitution:

A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.

I will come back to this in the conclusion.

Bailyn presents as the primary concern for the revolutionaries as the concern of liberty as against power:

…the ultimate explanation of every political controversy was the disposition of power.

I have no idea if this is correct or not – it seems to me that when it comes to any subjective topic, and certainly to “revolution,” the term “every” is rarely applicable.  However, it is fair to assume that it was often true for many of the participants.  I approach this topic on this assumption.

The term “power” doesn’t quite capture the sentiment, as Bailyn explains via the editorial struggles of John Adams:

The colonists had no doubt about what power was and about its central, dynamic role in any political system…the essence of what they meant by power was perhaps best revealed inadvertently by John Adams as he groped for words in drafting his Dissertation on the Canon and Feudal Law.  Twice choosing and then rejecting the word “power,” he finally selected as the specification of the thought he had in mind “dominion,” and in this association of words the whole generation concurred.  “Power” to them meant the dominion of some men over others, the human control of human life: ultimately force, compulsion.

1.       the power or right of governing and controlling; sovereign authority.
2.       rule; control; domination.

There was no doubt to the colonists that dominion, or power, meant force…:

Most commonly the discussion of power centered on its essential characteristic of aggressiveness….The image most commonly used was the act of trespassing.

…and that the enemy and victim of power was liberty:

What gave transcendent importance to the aggressiveness of power was the fact that its natural prey, its necessary victim, was liberty, or law, or right.

The interesting insight of the revolutionary generation, as captured by Bailyn, is that they recognized that government was power, and the governors cared only for power and not for liberty.  Only the people cared for liberty.

Tuesday, March 12, 2013

Intellectual Property Brouhaha

In this small corner of the internet world where I occupy a good portion of my time, there are a handful of topics that remain unsettled within libertarian and Austrian dialogue.  Abortion is one; fractional reserve banking is another.

Another discussion has raised its head on occasion – that regarding the validity of intellectual property within a libertarian framework.  The latest iteration is the upcoming cage match pitting Robert Wenzel against Stephan Kinsella, replete with all of the drama typically preceding such performances.

I have never found the debate significantly important to me: can one own an idea (in its various manifestations)?  While it is to me personally a rather peripheral issue given the other, more clear-cut, governmentally-enabled property rights violations we face daily, it is an important consideration for some in the libertarian community. 

There is one aspect in this discussion that I find worth exploring: the means of enforcement. 

From the point of view of the pro-IP libertarian: does enforcement require government action?  I imagine there are minarchists that might suggest this.  Conversely, is the enforcement to be achieved solely by contractual means, as derived by market actors?  In this case, a libertarian bordering on anarcho-capitalist would seem to find comfort.

For the anti-IP libertarian: I understand the objection to the minarchist form of enforcement.  Is there an objection to the contractual form of enforcement?  If so, on what grounds is it suggested that such contracts be deemed invalid?  Here I do not speak to the practicality of enforcement, but to the application of libertarian theory.

To me, this question regarding means of enforcement is the only one that matters.  I hope to hear Wenzel outline his means of enforcement: via government action or contractual means.  If by government, this to me is a losing proposition.  If the means are contractual, I hope to hear Kinsella explain what, if anything, he would do about that.